Do You Have to Pay Taxes on Grant Money?

Receiving grant money can be an exciting opportunity, whether it’s to fund your education, support a research project, or help launch a new business. However, many recipients find themselves wondering about the financial implications—specifically, do you have to pay taxes on grant money? The answer isn’t always straightforward, as tax obligations can vary depending on the type of grant, its intended use, and your circumstances. Some grants are considered taxable income by the IRS, while others may be exempt if used for qualified expenses like tuition or research costs. Understanding the tax rules that apply to your specific situation is crucial to avoid unexpected liabilities and ensure compliance with federal and state regulations.

A financial advisor can help you create a plan to ensure that you can achieve your financial goals.

What Are the Different Types of Grants

Personal grants are financial awards for individuals pursuing personal goals, including educational, artistic, or charitable endeavors. Grant recipients receive the money without the requirement of paying back a penny. Instead, the terms of the grant constrain recipients in using the money for specific purposes.

Like personal grants, business grants are free money to use for specific purposes. The difference is that these grants are solely available for businesses. Typically, businesses win grants for projects that uplift the community or perform critical technological or medical research. In addition, some grants are for businesses that can’t acquire financing for unfair or uncontrollable reasons (such as operating in an impoverished area where conventional business loans aren’t available).

Generally, successful grant applicants meet the eligibility criteria of the grantmaker. You can obtain a personal grant by submitting a detailed application, including a proposal for how you’ll use the money. Grantmakers can be governmental or private entities.

1. Personal Grants

Personal grants can come in amounts from several hundred dollars to over $100,000. Here are six common types you can receive:

Education grants: These grants assist individuals in funding their education expenses, including tuition, books, and housing. For example, the federal government provides Pell Grants to undergraduate students with dire financial needs. Pell Grants max out at $7,395 for the 2023-24 school year. Various education grants come from government agencies, private foundations, and educational institutions.
Housing grants: These grants help individuals secure housing. For example, numerous agencies and organizations across the country offer down payment assistance for would-be homebuyers with insufficient financial resources.
Healthcare grants: These grants provide financial assistance for medical expenses, including treatments, medications and healthcare services. For instance, fertility treatments are usually expensive, so various foundations give aid for in vitro fertilization.
Veteran support grants. Veterans often face a host of challenges when they come back home, from physical and psychological to financial. Grants such as the VFW’s Unmet Needs program provide $2,500 per veteran for debt relief, medical care, and more.
Professional grants: Private organizations typically allocate funds each year to support work in a specific field. Research and scholarship often receive funding, but funding also goes beyond these purposes. For example, National Geographic provides up to $100,000 for individuals breaking new ground in science, technology, and conservation.
Arts and culture grants: These grants support individuals involved in artistic or cultural pursuits, such as artists, musicians, writers, and performers. They can cover costs like materials, studio space, or exhibition fees. For example, the Ford Foundation offers these grants with a focus on documentaries.

2. Business Grants

A couple fills out paperwork to apply for a business grant.

Business grants help foster economic growth and entrepreneurship in economically challenged communities and populations. Here are four common types:

3. Government Business Grants

Government business grants are financial awards provided by various levels of government (local, state and federal) to support businesses in achieving specific goals or contributing to economic development.

These business grants can serve various purposes, including stimulating economic growth, creating jobs, fostering innovation and addressing specific needs within communities. Eligibility criteria for government business grants can vary widely depending on the specific program and the goals it aims to achieve. Federal grants are more competitive because they’re accessible to the entire country, while state and local grants can be easier to win because of their limited scope.

The U.S. Small Business Administration (SBA) offers various grant programs, including the Small Business Innovation Research (SBIR) program, which supports research and development efforts in small tech companies.

4. Minority Grants

Minority grants are financial awards supporting businesses owned by individuals who belong to ethnic or racial minority groups, which may include African Americans, Hispanic Americans, Native Americans, Asian Americans, and others. These grants aim to address historical disparities and promote economic empowerment within minority communities. They help level the playing field for minority entrepreneurs. At the federal level, the Minority Business Development Agency makes such grants, with various other grants available by region.

5. Women’s Grants

Women’s grants are financial awards exclusively for businesses owned and operated by women. Women’s grants aim to promote gender equality in entrepreneurship, empower women in business, and provide them with resources to succeed. For example, the Women’s Business Enterprise National Council (WBENC) provides the Dorothy B. Brothers Scholarship, which gives $11,000 per grantee for tuition for executive education.

6. Veteran Grants

Veteran grants support businesses owned by U.S. military members who have ended their service. Veterans’ grants aim to assist veterans in transitioning to civilian life by providing resources and financial support for starting or growing a business. Although there are no ongoing grants that veterans can apply for annually, financial support is occasionally available from the U.S. Department of Veterans Affairs (VA). In addition, veterans can also find grants at the state level.

Do You Have to Pay Taxes on Grant Money?

Personal grants usually aren’t taxable if you adhere to the conditions for receiving and using the money. For example, an education grant is tax-free if you apply it to the intended expenses, such as tuition, books, and learning equipment. However, paying room and board may cause the grant to count as taxable income.

On the other hand, business grants are often taxable unless the organization receiving the money is a 501(c)(3) nonprofit. That being said, the taxation of business grants depends on the specific grant, the terms under which it is given, and how the recipient uses the money. As a result, it’s best to review the details of the grant you’re seeking and work with a tax professional for more insight.

How to Determine If You Have to Pay Taxes on Grant Money?

Not all grants are taxable, and the tax treatment can vary depending on factors such as the purpose of the grant, how you used it, and the specific regulations governing the grant program. Here are five steps to determine if you have to pay taxes on grant money:

Review the grant agreement: Start by carefully reviewing the grant agreement or documentation provided by the grantmaker. This document will often outline the specific terms and conditions of the grant, including any tax implications.
Ask the grantmaker: If the grant agreement doesn’t provide clear information about the tax status of the grant, reach out to the grantmaker or the organization providing the grant. They can guide you on whether the grant is considered taxable income.
Search the IRS website: Visit the official website of the Internal Revenue Service (IRS) and look for information related to grants and taxable income. The IRS provides valuable resources and publications that can help you understand the tax implications of grant money.
Research your state laws: In addition to federal tax laws, state tax laws may also impact the taxability of grant funds. Research the specific tax laws in your state’s Department of Revenue website to see if there are any additional considerations.

If you’re still unsure about the tax implications of the grant, it’s advisable to consult with a qualified tax professional or accountant. They have expertise in tax matters and can provide personalized advice based on your specific situation.

Bottom Line

A man filling out paperwork for taxes after receiving a personal grant.

Understanding whether you have to pay taxes on grant money is essential for anyone who receives financial awards, whether for education, research, or business purposes. The taxability of grant money largely depends on how the funds are used and the specific terms of the grant. Generally, if the grant is used for qualified educational expenses like tuition and required fees, it may not be taxable. However, if the funds are spent on non-qualified expenses such as room and board, travel, or equipment, they could be considered taxable income. For business or research grants, the IRS often treats the money as taxable unless it is used for deductible business expenses. Because tax laws can be complex and subject to change, it’s always wise to consult a tax professional or refer to IRS guidelines to ensure compliance.

Tips for Paying Taxes on Grant Money

Grant money can help you overcome otherwise insurmountable financial obstacles, but taxes can undercut that funding. Fortunately, a financial advisor can provide tax expertise to keep you in the clear. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Grant money is free money for specific purposes. On the other hand, grant deeds may have a similar name but are for an individual transferring property rights to another person.